Andreas Schleicher, director of the OECD’s education directorate, was scathing about the country’s “disappointing” performance, saying he had once viewed Sweden as “the model for education”.

“It was in the early 2000s that the Swedish school system somehow seems to have lost its soul,” he said at a press conference in Stockholm. “Schools began to compete no longer on delivering superior quality but on offering shiny school buildings in shopping centres, and I think that’s the issue we are really seeing.”

The call for “revised school choice arrangements” will have resonance in the UK, where the coalition government’s programme to launch free schools funded by public money was in part inspired by Sweden.

Since the 1990s, Sweden has allowed privately run schools to compete with public schools for government funds. Critics on the left blame the voucher system for declining results, saying it has opened the door for schools more interested in making a profit than providing solid education. Conservatives say students have been given too much influence in the classroom, undermining the authority of teachers.

The OECD report says: “Student performance on the Programme for International Student Assessment (Pisa) has declined dramatically, from near the OECD average in 2000 to significantly below average in 2012. No other country participating in Pisa saw a steeper decline than Sweden over that period.”

It warns that Sweden had “failed to improve its school system despite a series of reforms” and that a “more ambitious, national reform strategy is now urgently needed”.

The report calls for a range of measures including higher salaries, better training, and tougher entry requirements for the teaching profession; more centralised efforts to integrate immigrants into education; and a more active approach to improving performance from the country’s schools inspectorate.

Gustav Fridolin, Sweden’s education minister, welcomed the recommendations, saying that they would feed into Sweden’s ongoing review of education.

“We now have a good picture of the challenges,” he told Sweden’s Expressen newspaper. “The next step must be to put it in a Swedish context and set the Swedish goals which the OECD is looking for, as well as a detailed action plan to meet those goals.”

Schleicher argued that the high level of choice Swedish pupils enjoyed over which school they attended needed to be backed up by a more effective regulatory system.

“The more choices that parents have in a school system, the stronger and more robust the system needs to be,” he said.

The report blamed the system of school choice for the failure of almost half of children from immigrant backgrounds (48%) to make the grade in mathematics.

Rather than recommending rolling back Sweden’s system of free choice and competition in schools, however, it suggests that the country “revise school choice arrangements to ensure quality with equity”.

That would involve limiting the independence of free schools from local education authorities by bringing in new national guidelines to allow municipalities to “integrate independent schools in their planning, improvement and support strategies”.

The report also recommends helping disadvantaged families make better school choices, so that their children, as well as those from middle-class families, apply to the country’s more popular, better performing schools.

Finally, it suggests that municipalities restrict the ability of some parents to choose their children’s schools by introducing “controlled choice schemes that supplement parental choice to ensure a more diverse distribution of students in schools”.

Since taking office last October, Sweden’s Social Democrat-Green coalition has launched a review of Sweden’s education system, which will report next year, and pledged a major rise in teachers’ salaries in 2016.